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America's high-tech companies are ramping up spending on research. That's a good sign for the country's competitiveness—and an opportunity for stock investors.

One-fifth of the companies in the Standard & Poor's 500 index spend at least 5% of their revenue on research and development, most of them information-technology or drug outfits. Among these, median research-and-development spending increased by 9% over the past year. That's triple the median increase in revenue for those companies.

Today's surging research outlays can pay off nicely for stockholders. A landmark study from Georgetown University found that during the 50 years through 2001, when R&D-intensive companies suddenly started spending more, their profit margins tended to rise one to three percentage points faster than those of peers over the following five years, and their shares tended to beat the market by five percentage points.

U.S. COMPANIES HELD a record $1.45 trillion in cash at the end of 2012, up 10% from 2011's level, according to Moody's. And while 58% of that is stashed overseas for tax reasons, that leaves a mountain of idle cash sitting stateside.

A landmark study found that during the 50 years through 2001, when R&D-intensive companies suddenly started spending more, their shares tended to beat the market by five percentage points.
Stuart Goldenberg for Barron's

For their U.S. funds, corporations face a carrot and a stick. Congress currently offers generous tax credits for companies that boost R&D spending, while the Federal Reserve punishes cash-clutchers with wealth-sapping interest rates. The one-year Treasury bill recently yielded 0.14%, too little to keep up with inflation, which ran at 2% in the year through February.

That's no reason for companies to squander money, of course. For accounting purposes, research isn't treated as a long-term investment, but rather as a simple expense. Tax credits aside, a research outlay comes straight out of profits while adding nothing to a company's assets, even though it clearly creates value. In other words, it makes companies look less prosperous today before adding to their profits tomorrow.

But investors who watch for high-tech businesses with surging R&D spending can get more growth than they pay for. They effectively buy into new products or services before they're launched, or even announced, and long before Wall Street has built them into earnings forecasts. One study from the University of Illinois even found that investors can beat the market by favoring stocks with low price-to-R&D ratios, just as they might do with shares with modest price/earnings ratios.

The five companies that follow have increased their research-and-development spending by at least 15% over the past year and look reasonably priced.

A year ago,
Forest Laboratories
(FRX) saw its patent expire on the blockbuster antidepressant Lexapro. The effect on the company's financials hasn't been subtle. Sales for Forest Laboratories in fiscal 2013, which runs through this month, are expected to fall by one-third from the total a year earlier; earnings per share, by 90%.

The company has another patent expiration coming, for the Namenda Alzheimer's drug, in fiscal 2015. But it also has the "deepest pipeline in specialty pharma," with six drugs poised to launch over the next two years, according to Jim Molloy at Janney Capital Markets, who initiated coverage of the stock in January with a Buy rating. One of the new drugs, Linzess, for irritable-bowel syndrome, will grow into a $1 billion seller, he predicts—a big hit for a company with $3 billion in yearly sales.

Malloy expects earnings for Forest, which fetches about $38 a share, to rebound from 35 cents a share to $2.15 in two years, and cash and equivalents to swell to $14 a share in a year, with no debt.

GoogleGOOG -0.730032788073112%Google Inc. Cl CU.S.: NasdaqUSD548
-4.03-0.730032788073112%
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1.674899999999980.30563868613138684%
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27.041297192738327Market Cap
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1228170More quote details and news »GOOGinYour ValueYour ChangeShort position
stock (GOOG) has rocketed from about $650 a share in mid-November to more than $800. It now goes for 18 times this year's earnings forecast, versus 15 times for the typical U.S. stock; but the company's momentum justifies the premium price. The percentage of its searches that return lucrative product listings with images is surging, largely because Google now requires merchants to buy such ads to participate in its Google Shopping program, according to Jefferies analyst Brian Pitz.

GOOGLE'S YOUTUBE unit is running more ads, so revenue there should jump 76% this year, to $4.5 billion. Mobile revenue is soaring, too, and don't count out Google's ability to make winning handsets and tablets. When it bought Motorola Mobility last year, it inherited 12-to-18 months' worth of Motorola products in development, according to Pitz. From now on, products should show more influence from Google.

EMC is contributing its data-analytics unit, with sales of $300 million last year, which it aims to grow to $1 billion by 2017. VMware is contributing some loss-making business units to the new venture, which should improve its own margins right away, and could unlock a higher stock value for EMC, according to Shebly Seyrafi at FBN Securities.

Meanwhile, VMware has developed a new public cloud service to take on
Amazon.com AMZN -0.66472676793294%Amazon.com Inc.U.S.: NasdaqUSD372.1
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173953601865.354
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577469More quote details and news »AMZNinYour ValueYour ChangeShort position
(AMZN), starting later this year. Revenue for EMC is expected to climb 8% this year and next. The shares go for 13 times this year's earnings forecast.

The company's purchase of Pharmasset in 2011 gives it a pipeline of drugs in development for hepatitis C. And Gilead's cancer drugs in late-stage research are underappreciated, according to Oppenheimer analyst David Ferreiro. At $45, shares of Gilead look a touch pricey relative to this year's earnings forecast of just over $2 a share. But they're plenty affordable relative to estimates of nearly $5 a share three years from now.

If all goes well, the "Intel Inside" days of personal computers could give way to a made-by-Intel model extending to all sorts of gadgets. Intel sells for 11 times this year's earnings forecast and yields 4.2%.